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Combining Forecast Densities from VARs with Uncertain Instabilities

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  • James Mitchell

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  • Jore, A. S., Vahey, S. P.

Abstract

Clark and McCracken (2008) argue that combining real-time point forecasts from VARs of output, prices and interest rates improves point forecast accuracy in the presence of uncertain model instabilities. In this paper, we generalize their approach to consider forecast density combinations and evaluations. Whereas Clark and Mc-Cracken (2008) show that the point forecast errors from particular equal-weight pair wise averages are typically comparable or better than benchmark univariate time series models, we show that neither approach produces accurate real-time forecast densities for recent US data. If greater weight is given to models that allow for the shifts in volatilities associated with the Great Moderation, predictive density accuracy improves substantially.

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Bibliographic Info

Paper provided by National Institute of Economic and Social Research in its series NIESR Discussion Papers with number 303.

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Date of creation: Jan 2008
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Handle: RePEc:nsr:niesrd:303

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  1. Anthony Garratt & Gary Koop & Emi Mise & Shaun Vahey, 2008. "Real-time Prediction with UK Monetary Aggregates in the Presence of Model Uncertainty," Reserve Bank of New Zealand Discussion Paper Series DP2008/13, Reserve Bank of New Zealand.
  2. Geweke, John & Amisano, Gianni, 2009. "Optimal Prediction Pools," Working Paper Series 1017, European Central Bank.
  3. Norman R. Swanson & Valentina Corradi & Andres Fernandez, 2011. "Information in the Revision Process of Real-Time Datasets," Departmental Working Papers 201107, Rutgers University, Department of Economics.
  4. Anthony Garratt & Gary Koop & Shaun P. Vahey, 2006. "Forecasting Substantial Data Revisions in the Presence of Model Uncertainty," Birkbeck Working Papers in Economics and Finance 0617, Birkbeck, Department of Economics, Mathematics & Statistics.
  5. James Mitchell & Jore, A. S., Vahey, S. P., 2008. "Combining Forecast Densities from VARs with Uncertain Instabilities," NIESR Discussion Papers 303, National Institute of Economic and Social Research.
  6. Geweke, John & Whiteman, Charles, 2006. "Bayesian Forecasting," Handbook of Economic Forecasting, Elsevier.
  7. Amisano, Gianni & Giacomini, Raffaella, 2007. "Comparing Density Forecasts via Weighted Likelihood Ratio Tests," Journal of Business & Economic Statistics, American Statistical Association, vol. 25, pages 177-190, April.
  8. Wallis, Kenneth F., 2002. "Chi-squared tests of interval and density forecasts, and the Bank of England's fan charts," Royal Economic Society Annual Conference 2002 181, Royal Economic Society.
  9. Andersson, Michael K & Karlsson, Sune, 2007. "Bayesian forecast combination for VAR models," Working Paper Series 216, Sveriges Riksbank (Central Bank of Sweden).
  10. Todd E. Clark & Michael W. McCracken, 2007. "Averaging forecasts from VARs with uncertain instabilities," Finance and Economics Discussion Series 2007-42, Board of Governors of the Federal Reserve System (U.S.).
  11. Valentina Corradi & Norman Swanson, 2004. "Predictive Density Evaluation," Departmental Working Papers 200419, Rutgers University, Department of Economics.
  12. James Mitchell & Stephen G. Hall, 2005. "Evaluating, Comparing and Combining Density Forecasts Using the KLIC with an Application to the Bank of England and NIESR 'Fan' Charts of Inflation," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 67(s1), pages 995-1033, December.
  13. Diebold, Francis X & Gunther, Todd A & Tay, Anthony S, 1998. "Evaluating Density Forecasts with Applications to Financial Risk Management," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 863-83, November.
  14. Robert L. Winkler, 1981. "Combining Probability Distributions from Dependent Information Sources," Management Science, INFORMS, vol. 27(4), pages 479-488, April.
  15. Eklund, Jana & Karlsson, Sune, 2005. "Forecast Combination and Model Averaging Using Predictive Measures," CEPR Discussion Papers 5268, C.E.P.R. Discussion Papers.
  16. Kenneth F. Wallis, 2005. "Combining Density and Interval Forecasts: A Modest Proposal," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 67(s1), pages 983-994, December.
  17. Marco Aiolfi & Carlos Capistrán & Allan Timmermann, 2010. "Forecast Combinations," Working Papers 2010-04, Banco de México.
  18. Michael P. Clements, 2004. "Evaluating the Bank of England Density Forecasts of Inflation," Economic Journal, Royal Economic Society, vol. 114(498), pages 844-866, October.
  19. Cees Diks & Valentyn Panchenko & Dick van Dijk, 2008. "Partial Likelihood-Based Scoring Rules for Evaluating Density Forecasts in Tails," Discussion Papers 2008-10, School of Economics, The University of New South Wales.
  20. Dean Croushore & Tom Stark, 1999. "A real-time data set for macroeconomists," Working Papers 99-4, Federal Reserve Bank of Philadelphia.
  21. James Mitchell & Wallis, K.F., 2008. "Evaluating Density Forecasts: Forecast Combinations, Model Mixtures, Calibration and Sharpness," NIESR Discussion Papers 320, National Institute of Economic and Social Research.
  22. Hall, Stephen G. & Mitchell, James, 2007. "Combining density forecasts," International Journal of Forecasting, Elsevier, vol. 23(1), pages 1-13.
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